More than four years after the financial crisis, it is increasingly clear how traumatized individual investors were by the market volatility of those years and the portfolio losses they suffered. It’s also clear how difficult it will be for advisors and other financial professionals to help these clients take steps to act in their own best interests. But, now is the perfect time for advisors to re-engage with clients, to reflect on past experience and look for innovative ways to build more durable portfolios. 

Industry data shows the depth of the trauma suffered by investors. In 2008, the Standard & Poor’s 500® Index lost 37 percent, knocking many investors’ portfolios down significantly. Since the market reached its low point, it’s been up by 129 percent on a total return basis[1]. Despite these returns, investors have withdrawn more than $265 billion from domestic equity funds[2] since that time. Though flows to equity funds show early signs of reversing in 2013, many investors remain overly allocated to cash and other low-return instruments.

What’s going on? During the last year, Natixis Global Asset Management surveyed 5,319 investors and 341 advisors, and we found that investors were deeply affected by their experiences – something that advisors recognized. More than seven in 10 investors (71%) told us that volatility has damaged their confidence in the markets, half (52%) say volatility undermines their ability to achieve their goals and half (51%) have lower expectations for returns in the future.

So even as the U.S. stock market posts a fourth consecutive year of gains, many investors continue to remain paralyzed by indecision or display behavior that undermines their long-term savings goals. Two-thirds of investors (67%) we surveyed told us that they can’t decide whether they should invest to obtain return or to preserve capital, and 57 percent say they don’t plan to change their cash allocations, even while recognizing that the low returns they are earning will limit their ability to reach their financial goals. More than half of investors (56%) say they invest or save less than they otherwise would because they fear losing even more money. The end result is that investors become mired in a cycle of fear, passive investing and low returns – all of which limits their potential for growth. 

So how can advisors help their clients overcome this nervous defensive investment philosophy? 

Although most advisors have probably not thought much about classical psychology since college, there are certainly a few proven techniques that financial advisors can use to help their clients. Psychologists routinely engage in discussions with their patients about their past experiences, interpret the meaning of those experiences and offer solutions to help patients overcome their challenges. That’s exactly what the best advisors do with their clients.

Do all advisors need to take a refresher Psychology 101 course? Not exactly, but for many clients, the road ahead is shaped by the past. Advisors need to engage their clients in frank discussions about their expectations and fears. They should help clients understand the sources and drivers of risk in their portfolios. Once risk is understood, the advisor can work to seek maximum returns given the risk the investor is willing to take.  By eliminating myths and mysteries around risk, advisors can help their clients return to the markets and avoid surprises. 

The opportunity is there for advisors: Investors, battered by market declines and fearful of the future, are looking to their advisors for assistance. More than six in 10 (62%) investors we surveyed say that they are now more interested in discussing risk with their advisor than before.

Of course, understanding is only part of the healing process. Investors need to not only recognize how – and why – they were traumatized, advisors need to have a roadmap to identify investment strategies that help their clients re-engage in the markets.

We encourage financial advisors to achieve this goal through a more durable approach to portfolio construction that’s designed to primarily focus on risk. Durable portfolios draw on an array of asset classes, including alternatives, that can potentially help investors to manage risk, stay in the market despite unpredictable conditions, and earn consistent long-term growth.

Most investors are willing to consider new strategies: Nearly seven in 10 (69%) of them told us they want to replace traditional techniques with new approaches. Yet, although half (51%) of investors said they would consider alternative investments such as hedge funds and private equity for their portfolio, just a third (35%) say they have discussed such alternatives with their advisor. This is a missed opportunity for advisors to proactively help clients address their fears and insecurities.

What’s the next step for advisors and their clients? Sit down and talk. Clients need to honestly communicate their expectations and concerns. Advisors need to clearly explain the various options available to their clients, and help them negotiate the fears and anxieties that they have acquired through past experience. The result will be better communication and, ultimately, better financial results.

David Giunta is president and chief executive officer of Natixis Global Asset Management, U.S. Distribution

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